SOVIET HEARTLAND RESISTS REFORMS

By Michael DobbsBy Michael DobbsDecember 23, 1990

SVERDLOVSK, U.S.S.R. -- Back in April, when he was elected mayor of this sprawling industrial city in the Ural Mountains, Yuri Samarin was bursting with enthusiasm. Russia, he felt, was on the verge of a new economic revolution that would transform the lives of its citizens rapidly and relatively painlessly.

As spring has passed and winter has set in, the mayor has become more and more discouraged. From his office in City Hall, with its bas-reliefs of workers and soldiers building a glorious communist future, Samarin has a grandstand view of an economy that is falling apart and a society that is growing tired of democracy. The stores are empty. Industrial production is dropping sharply. Normal economic ties between city and countryside have been disrupted. Mass unemployment and spiraling inflation loom on the political horizon.

"The euphoria we felt during the election campaign has passed," said Samarin, a former violinist who typifies the new breed of radical politician now running many big cities in the Soviet Union. "We thought that once we took office, things would start moving much more quickly. But the closer we get to the market, the more people seem to be afraid of it."

Together with the threatened disintegration of the Soviet Union, the collapsing economy has provided powerful ammunition to hard-liners who argue that Mikhail Gorbachev's perestroika reform movement has gotten out of hand. The danger of a conservative backlash was dramatically underlined on Thursday by the resignation of Foreign Minister Eduard Shevardnadze, a key Gorbachev ally and one of the pioneers of perestroika.

In the Soviet Union and throughout its former empire in Eastern Europe, where communism collapsed altogether just one year ago, anxieties and uncertainties about the future deepen almost daily. How economies in the East are coping and what, if anything, the West can do about it are the subject of this three-part series.

Nowhere is the scale of the challenge facing Soviet reformers better illustrated than in the Ural Mountains that separate Europe from Asia. This is the heart of the Soviet Union's military-industrial complex, "the most reliable pillar" of the Soviet state, in the phrase of poet Alexander Tvardovsky. Most of the Soviet tanks and airplanes that defeated Adolf Hitler's armies in World War II were produced in the Urals. The Sverdlovsk region is still the principal source of tanks, rockets and nuclear missiles for the Soviet armed forces.

More than five years after Gorbachev launched his great experiment, Sverdlovsk remains a stronghold of the old command-and-administer system. Nearly 90 percent of its factories are still under the direct tutelage of Moscow, relying on the state for virtually everything. The reformers have come to power, their ideas have triumphed but the economy remains stubbornly resistant to change. The "market" is in danger of becoming another empty political slogan, wonderful in theory but impossible to implement in practice.

Last spring, when Gorbachev wanted to see for himself how Soviet workers would react to the market economy, he flew to the Urals. He was greeted by a storm of complaints about rising prices and black marketeers that convinced him that Polish-style "shock therapy" would be too dangerous for the Soviet Union.

The hostile reception that Gorbachev encountered in Sverdlovsk earlier this year illustrates the dilemma he faces in pushing ahead with radical reform. In the long term, he knows that the Soviet Union must shift to a market economy to remain a world power. In the short term, however, he is worried that the abolition of government subsidies to money-losing industries and the introduction of free-market prices could result in an uncontrollable social explosion.

There already have been rumblings of discontent from the Urals. A year ago, a vodka shortage in Sverdlovsk provoked angry street demonstrations. Similar protests have taken place in other Urals cities, such as Perm and Chelyabinsk, over the shortage of basic consumer items including tobacco and food.

"If living standards continue to fall, major unrest is quite possible," predicted Vladimir Semikov, a member of the 11-man strike committee at the giant Uralkhimash chemical machinery plant in Sverdlovsk. "Gorbachev promised us that our lives would get better in two or three years. Instead, things are getting worse all the time."Popular Backlash

Swept into City Hall on a wave of popular dissatisfaction with the Communist regime, Samarin and his fellow self-proclaimed "democrats" are idealistic and well-intentioned. But in terms of crude political power, they seem outmatched by the factory managers and Communist Party apparatchiks who continue to make the important economic decisions.

The strongest political card in the hands of the radicals was the backing of ordinary Soviet citizens, disgusted by bureaucratic privileges and fed up with their own low living standards. As the economic crisis has deepened, popular support for the democrats has waned. The latest polls suggest that the approval rating of Sverdlovsk's new administration has fallen to less than 15 percent -- only a few percentage points ahead of the Communist Party's.

"Things certainly aren't getting any better and we are in power -- so obviously we are getting the blame," said Samarin, in an interview in his office. "Our reforms are being blocked by the representatives of the old administrative-command system who are making active propaganda against us."

To emphasize his point, the mayor flicked through a verbatim transcript of a recent meeting of factory directors and economic bureaucrats in the Sverdlovsk region. He had underlined one quote in red because it seems to sum up what is happening not only in the Urals, but throughout the Soviet Union: "The parliaments and soviets {local elected councils} have lost power. In fact, they never assumed it in the first place. We still have economic power and we do not intend to give it up."

Large chunks of Sverdlovsk, which has a population of 1.5 million, come under the direct supervision of government ministries in Moscow. The city is surrounded by dormitory towns serving the large rust-belt factories: Most of these so-called "socialist cities" are effectively beyond the control of the local authorities. City Hall is responsible for public transportation, retail trade and very little else.

The strategic importance of Sverdlovsk is reflected in the fact that the city is normally closed to foreigners. Permission to visit the Sverdlovsk region must be obtained not only from the local authorities but also from the Defense Ministry and KGB security police.

The captains of Soviet industry are not entirely opposed to change. In public, many have spoken in favor of a market economy and against the diktat of the central planners. But they also are alarmed by the disruption caused by the transition from one economic system to another and are desperate for some kind of reassurance.

"Under the old system, when we were promised a delivery of metal on a certain day by the ministry, we got it," said Arkady M. Chernetsky, general director of Uralkhimash. "In theory, it's certainly possible to move over to a market. But you have to be consistent. Either you have a system of rigid state orders or you have a market system. You can't mix the two."

Evacuated to the Urals from the Ukraine during World War II in advance of the Nazi invaders, Uralkhimash is typical of the monopolistic conglomerates that form the backbone of Soviet heavy industry. Employing more than 20,000 workers, it is the sole source of chemical machinery for the entire Soviet Union. Most of its suppliers also are monopolies.

"Privatization is fine in principle, but how do you privatize a huge enterprise like ours?" asked Chernetsky, who seems less concerned about showing a profit than in keeping his workers happy and making sure he fulfills compulsory state orders. "They can adopt whatever economic reform they like, but I can predict that Uralkhimash will continue to belong to the state for the foreseeable future."

'No More Experiments'

Earlier this month, the managers of state-run enterprises gathered in the Kremlin and gave Gorbachev an ultimatum: "no more ill-considered economic experiments." They warned him that unless the state intervened to guarantee supplies and raw materials, production could fall by half and "our entire economic structure could collapse."

"The president's task is to ensure that discipline improves," said the president of the managers' association, Alexander Tizhakhov, who is also director of a heavy machinery plant in Sverdlovsk. "We understand that conflicts are inevitable and they will also affect the economy. But in the transition period, a strong dose of planning continues to be essential."

As an example of the difficulties that can arise when the old system breaks down, Tizhakhov cited the case of his own factory. Under U.S.-Soviet arms control agreements, it has stopped churning out launching mechanisms for medium-range nuclear missiles. Instead, it began producing refrigerators. But after the row between the Kremlin and Lithuania earlier this year over independence, it lost its sole supplier of refrigerator motors.

In fact, according to Samarin, who worked at a defense plant before becoming mayor, examples of successful conversion from military to civilian production are very rare. Despite billboards proclaiming "A World Without Weapons Is the Ideal of Socialism," the manufacture of consumer goods accounts for less than 15 percent of the total output of Sverdlovsk factories. All the rest is military equipment or heavy machinery.

The defense plants have traditionally received priority in the allocation of skilled labor, raw materials and other industrial requirements. Back in Moscow, their needs are protected by one of the most powerful interest groups in Soviet politics. The military-industrial lobby brings together senior party officials, leading scientists and industrialists, and top generals. Their opposition effectively dealt the final blow last fall to the radical "500-day" program that envisaged a forced march toward the market economy.

"Everybody is defending their corporate interests," said Samarin. "Nobody will say openly that he is against the market -- but they all have a different understanding of it. The directors of the big factories think that the basis of the nationwide market is a powerful state sector."

The outlook is not entirely bleak. Over the past 12 months, several hundred privately run businesses or cooperatives have opened in the Sverdlovsk region. But they are operating on what a local official describes as "the lowest rung of the economic ladder," completely overshadowed by sprawling state-run conglomerates such as Uralkhimash and Uralmash, a heavy machinery and defense production complex that employs more than 40,000 workers.

Some of the most successful small businesses have sprung up in the media. After censorship was abolished last summer, Sergei Plotnikov quit his job on the local Communist Party newspaper and set up an independent publishing house known as Ural-Soviets. With a loan from the regional council, he was able to buy a computer and software. The paper shortage was a problem, but he eventually found a print shop about 50 miles from Sverdlovsk whose workers were eager to earn overtime.

Such success stories are, however, rare. In an economy in which virtually everything is in short supply and official prices do not reflect real costs, entrepreneurial activity has frequently taken the form of speculation. The quickest way to make a profit is by buying up scarce items and selling them on the black market.

"In the West, members of the drug mafia receive a profit of 250 percent. In the Soviet Union, there is a 1000 percent difference between the state price of meat and the black market price. Of course, there will be speculation. Until we introduce real prices, it's impossible to speak of serious economic reform," said Sergei Vozdvizhenski, deputy chairman of the Sverdlovsk regional council.

Asked why there are no private bakeries in Sverdlovsk, despite new laws legalizing private enterprise, another local official replied with a shrug: "If a loaf of bread costs 15 kopecks and the ingredients that are required to make it cost more than a ruble, what do you expect?"

Retreat From Reform

As the problems mount, there is a strong temptation to retreat to the familiar ways of running the economy. Over the past few weeks, Gorbachev has issued a series of presidential decrees reasserting central controls over the economy. He has ordered Soviet factories to continue dealing with each other on the basis of the old five-year plan, telling them in effect to forget commercial advantage. He also has told them to surrender most of their hard-currency earnings to the central government.

The purpose of these measures is clear enough: to prevent a catastrophic decline in economic production and pay for imports of food and essential supplies for industry. The effect, however, is to further postpone the introduction of a real market.

Sensing that events are moving in their direction, conservatives are clamoring for the reimposition of state controls over the economy to save the Soviet Union from disaster. The boldest among them have even begun to attack Gorbachev personally, in a way they would not have dared just a few months ago.

"As long as Gorbachev remains leader, everything is bound to get worse in this country. He is completely indecisive," said Valery Romanov, a Communist Party secretary in Sverdlovsk. "If things go on like this, there will be a social explosion. The entire parliamentary corps will be swept away."

The reformers have not yet given up the fight. But they are beginning to understand that the road to a market economy will be much more painful and protracted than they ever imagined.

The 20th century has seen many transitions from capitalism to socialism. Destroying free-market mechanisms that have developed over many centuries is simple enough, provided a regime is prepared to employ sufficient force. Re-creating them is much more complicated. As a joke now circulating here puts it: "We know it is possible to make fish soup out of an aquarium, but nobody has yet succeeded in making an aquarium out of fish soup."